Global Shipping Faces Rough Seas

Ship crossing Panama Canal at Miraflores Locks - Panama City, Pa

Old locks restricted transit of ultra large container vessels (ULCV) through the Panama Canal

By Dan Shryock

When containers of green coffee heading for the West Coast of the United States didn’t arrive on time in September, news quickly spread. Hanjin Shipping Co., the world’s seventh-largest shipping firm, had filed for bankruptcy stranding as many as 80 ships at sea.

The news was a clear indication that the global shipping industry was facing a rising tide of problems and both coffee and tea importers were likely to get caught in a rough surf.

At Royal Coffee in Emeryville, Calif., the impact was small but immediate.

“We had one container stranded at sea. It was coming from Bali,” Royal Coffee spokesman Evan Gilman said. “It was only delayed three or four days so we got lucky. But it gave us a sense of uncertainty until we worked out the logistical problems.”

Importers up and down the West Coast reported similar delays. It didn’t take long for Royal Coffee and the others to conclude that problems were not isolated to the South Korean company. Too many ships on the high seas had created an excess of cargo space, thus pushing down freight rates. The economic law of supply and demand had taken effect. Overcapacity had lowered the demand for space on each ship. As a result, prices tumbled.

The break-even price point for shipping companies is $1,400 per container per month, analysts say. On the Asia-Europe route used as a benchmark for tracking prices, freight rates have been averaging less than $700 per container for more than a year. Estimates place the combined losses for the 20 top companies as high as $20 billion in 2016.

For Hanjin, the situation was exaggerated by high debt. As soon as creditors decided to cut off funds filing for bankruptcy the company’s only option. The 80 Hanjin container ships had no place to go after ports around the world denied access. In time, the ships docked, cargo was unloaded and the coffee was delivered.

Cargo owners around the world concerned about a similar event with another carrier have begun shifting their business to shipping lines considered financially stable. Shipping operators are looking at mergers in order to stay afloat.

And while the global shipping industry remains at overcapacity, removing Hanjin from routes between Asia and United States created a carrier shortage.

“The collapse of Hanjin has removed significant ready capacity out of the market, allowing carriers to be more selective towards higher paying cargos and providing support for previously announced general rate increases,” said Donald Pisano, president of American Coffee Corporation in Jersey City, New Jersey.

“I see the tightened capacity may delay some shipments of coffee out of Southeast Asia as they are boxed out by higher-paying freight,” he said. “I suspect this situation may be temporary until the prevailing carriers introduce additional capacity to meet the immediate needs,” he said.

Back in California, Royal Coffee already sees some price fluctuation.

“They’re shuffling everything around,” Gilman said of the shipping companies. “Some are breaking contracts and some are getting customers to renew early. Shipping costs are likely to go up.

“I would assume that importing costs will likely be higher in the short term. It’s not too severe at this point. It seems the companies are doing what they can to mitigate their risks,” he said. “Shipping costs are far too low to continue transporting goods. Their hope would be to reduce supply and increase demand for their services.”

16i6 shipping chart

** November is through Nov. 12, 2016

Expect mergers and acquisitions

Determined to reduce the long-term ship capacity glut and survive, some shipping companies are looking at competitors for merger or buy-outs, according to Philip von Mecklenburg-Blumenthal, head of US operations for the international online freight marketplace Freightos.

The top three shipping companies in Japan – Mitsui O.S.K. Lines Ltd., Kawasaki Kisen Kaisha, and Nippon Yusen KK – announced in October they would merge their container operations.

In December A.P. Moller-Maersk A/S, owner of the world’s largest container line, purchased Hamburg Süd, a German container shipping line, from Oetker Group.

“We welcome consolidation,” Mikkel Elbek Linnet of Maersk Line told Bloomberg News in late October. “Our industry is fragmented and consolidation can help transform our business for the benefit of our customers.”

Expanded locks in the Panama Canal permit ships carrying as many as 13,000 TEU (20-foot equivalent unit) containers to pass across the isthmus between the Pacific and Atlantic oceans. Until completion of the 10-year expansion, most Asian-grown coffee beans landed on the West Coast and were shipped cross country by train. The largest ships now can reach ports along the US gulf and east coasts.

The new, larger Panamax ships deliver more than double the cargo carried by a standard 5,000 TEU vessel. The infrastructure needed to handle both the ships’ size and the volume of cargo at many American ports, however, are not yet ready to handle offloading. Work on an improved Bayonne Bridge connecting New York and New Jersey must be completed before the larger ships can pass under. That target date is late 2017. Larger cranes also must be added to New Jersey ports.

“On the positive side, we will see additional available capacity to the east coast and gulf coast ports, which will keep ocean rates relatively in check,” said American Coffee’s Donald Pisano. “On the negative side, we can expect increased congestion at the terminals with delays at the gate operations significantly impacting our draymen with increased turn times which, will come with a price.”

Evergreen Marine Corp. and Yang Ming Marine Transport Corp., two Taiwanese operators and major international players, are heavily invested in buying mega-ships. Evergreen has ordered 11 container ships at a cost of $140 million each, according to reports. Each fuel-efficient ship can deliver up to 18,000 containers. Yang Ming is awaiting five Panamax ships of its own.

There are now 1 million TEUs of capacity on the water or on order for the newest ultra large container vessels.

One year ago, ports along the US west coast were recovering from a prolonged labor dispute that delayed some containers from reaching coffee warehouses and also played a role in Hanjin’s decision to pull out of Oregon’s Port of Portland entirely. This time around, labor peace seems to be at hand.

The current collective bargaining agreement between the Pacific Maritime Association and the International Longshore and Warehouse Union is in place until July 2019 and talks are underway to extend that agreement. The two sides issued identical statements on Nov. 1 saying discussions had begun.

On the east coast, the United States Maritime Alliance Ltd. (USMX) and the International Longshoremen’s Association started their own talks this summer to possibly extend a contract that expires in September 2018. Neither side is commenting on the progress.

A Trump trade effect?

As the world watched, the US in November elected real estate mogul Donald J. Trump as its new president. Throughout the lengthy election campaign, Trump was critical of the country’s current trade imbalance. He opposed a tentative Trans-Pacific Partnership pact and also called for renegotiations or complete withdrawal from the long-standing North American Free Trade Agreement (NAFTA).

Coffee importers contacted for this report do not see any imminent impacts from Trump’s proposed moves, however.

“Coffee continues to be one of the largest internationally traded commodities so any changes in existing trade agreements could have an impact,” Pisano said, citing NAFTA, the Central America Free Trade Agreement (CAFTA), and the Colombia Free Trade Agreement. “Considering the fact that green coffee is a non-dutiable import commodity, a cancellation of current trade agreements may mean that imports from certain origins covered in those agreements may become subject to merchandise processing fees. Beyond that, it’s difficult to predict (any effects).”

Unlike world stock exchanges that reacted to the election outcome, von Mecklenburg-Blumenthal said he saw no initial effect on freight rates immediately after the election “and I don’t think anything will happen on the freight rates at least for the next two quarters.”

International turmoil such as wars or high seas piracy have no effect on ocean freight rates in the short term, he said.

“If international trade in and out of the United States were to decline with fewer trade agreements, this would affect demand and then supply will need to react,” he said.

“Right now, it’s just words.”

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